Category Archives: Business

Stretch Your Startup Dollars

Initial startup costs are some of the biggest expenses a new business owner will have to encounter. Before you turn a profit, there are many parts of the business that need to be covered up front, and entrepreneurs don’t always anticipate some of these expenses.

To reduce your startup costs and stretch your dollars a little farther, follow these tips.

 

Have a budget, and stick to it

A simple way to save money as a new business owner is to set spending and expense limits. However, a surprising number of business owners don’t have a formal budget, said Carissa Reiniger, founder of small business support community Thank You Small Business.

“There is so much power in knowing what is going on in your business, for better or for worse,” Reiniger told Business News Daily. “Managing the finances of my business is not something I naturally enjoy, so I’ve put rules in place to help me stay on track. I advise setting up a standard time every week or month for reviewing and managing your budget.”

Angie Segal, an ActionCOACH business coach, advised entrepreneurs to factor their own salary into the budget as soon as possible. [See Related Story: 6 Smart Budgeting Tips for Small Business Owners]

“When you don’t pay yourself, you take money out of the business elsewhere to cover your own expenses,” Segal said. “Giving yourself a salary forces you to make everything in your budget work.”

Thatcher Spring, CEO of GearLaunch, said entrepreneurs should always do as much as possible with what they have before they add more fixed costs.

“At my company, we only hire when there is too much for the current staff to reasonably accomplish without additional help,” he said. “I’ve also found that hiring less-experienced, smart, adaptable employees, instead of only those that are senior and highly experienced, can help keep salaries under control.”

 

Be flexible

When you created your business plan, you might have envisioned all of the latest office equipment, lavish holiday parties and enough staff to take on big projects. However, not all of those business luxuries are guaranteed.

Office Evolution founder and CEO Mark Hemmeter said small business owners can suffer from a lack of flexibility in their grand plans.

“Your ego and vanity can get in the way,” he said. “You want that car or that perfect sign, but it just isn’t a good fit for the core of the business.

Hemmeter recommended looking into short-term solutions, like using shared office spaces and hiring freelance workers, until you can afford to make long-term commitments such as acquiring private office suites and hiring full-time employees.

Spring added that business owners should always plan for every effort to take longer than expected, whether it’s launching a new website, signing up customers, sourcing new products or hiring employees.

“Make sure you always set aggressive goals, but realize that there will be unexpected terrain on the pathway to success,” he said.

 

Go inexpensive, but not cheap

Startup costs for a new business add up, but there are tips and tools for finding the best areas to spend the money and those where you can cut back a bit. Spring noted that there are numerous cost-effective, self-service tools available to small business owners who want to save money by taking care of their own branding and website development.

However, it’s wise to be wary of “free” opportunities, warned Raad Mobrem, CEO and co-founder of Lettuce Apps (acquired by Intuit).

“Free tools can be a bad idea — they’re free for a reason,” Mobrem said. “Always pay for the important things, like software. You can ask for discounts with B2B services. People understand that you’re a small business just starting out, and if they offer discounts, you’ll want to work with them in the future.”

Alternative Financing Methods for Startups

Many aspiring entrepreneurs have an idea for their business but lack the capital to actually start it. Brand-new businesses are often turned down for bank loans, and even if your business is established, funds can still be tough to secure. Loans funded by the Small Business Administration are usually more accessible, but they are becoming increasingly competitive.

So what options are left for someone aspiring to be a small business owner? Here are six options beyond bank loans for financing your startup.

 

Online lending

Online lenders have become a popular alternative to traditional business loans. These platforms have the advantage of speed, as an application takes only about an hour to complete, and the decision and accompanying funds can be issued within days. Because of the ease and quickness of online lending, economist and former U.S. Treasury Secretary Larry Summers said at the 2015 Lend It conference that he expects online lenders to eventually reach more than 70 percent of small businesses.

Angel investors invest in early-stage or startup companies in exchange for a 20 to 25 percent return on their investment. They have helped to start up many prominent companies, including Google and Costco. Mark DiSalvo, CEO of private equity fund provider Semaphore said, “You are likely to get an investor who has strategic experience, so they can provide tactical benefit to the company they are investing in.”

 

Venture capitalists

Venture capital is money that is given to help build new startups that are considered to have both high-growth and high-risk potential. Fast-growth companies with an exit strategy already in place can gain up to tens of millions of dollars that can be used to invest, network and grow their company frequently.

Brian Haughey, assistant professor of finance and director of the investment center at Marist College, said that because venture capitalists focus on specific industries, they can generally offer advice to entrepreneurs on whether the product will be successful or what they need to do to bring it to market. However, venture capitalists have a short leash when it comes to company loyalty and often look to recover their investment within a three- to five-year time window, he said.

 

Factoring/invoice advances

Through this process, a service provider will front you the money on invoices that have been billed out, which you then pay back once the customer has settled the bill. This way, the business can grow by providing the funds necessary to keep it going while waiting for customers to pay for outstanding invoices.

Eyal Shinar, CEO of small business cash flow management company Fundbox, says these advances allow companies to close the pay gap between billed work and payments to suppliers and contractors.

“By closing the pay gap, companies can accept new projects more quickly,” Shinar told Business News Daily. “Our goal is to help business owners grow their businesses and hire new workers by ensuring steady cash flow.”

Investors Will Fund Your Company

If you’re looking for an angel investor to fund your business, you may want to consider exactly what the investor is looking for to improve your chances of success.

Angel investors are individuals who invest in early stage or startup companies in exchange for an equity ownership interest. In a Business Insider article, renowned investor Ben Horowitz explained that, unlike traditional venture capitalists, angel investors usually invest smaller amounts of money, make their investment decisions quickly, and rarely require a board seat as a condition of investment. This makes them an attractive funding option for startups that don’t need large investments and want to retain more control over their business.

A survey by Propel(x), an online angel investment platform, revealed the top three reasons angel investors choose a specific business.

Exceptional management is vital for any business. Three-quarters of survey respondents said the management team of a startup was their biggest consideration for investing.

“Startups are not only about the technology or business idea but also very much about the people behind them,” said Swati Chaturvedi, CEO and co-founder of Propel(x). “A compelling, experienced team that can sell the vision and the potential impact is key to success, and something savvy angels look at closely.”

Some exceptional qualities to have as part of a management team are integrity, clarity of strategy and approach, professionalism and determination, Chaturvedi said.

 

Ability to understand the technology

Angel investors want to understand exactly what they are financing, especially for startups in the tech field. More than 50 percent of respondents claimed this as one of their top reasons for investing, and 94 percent find it helpful to have subject-matter experts explain the technologies within their company before investing. In fact, many choose not to invest in specific businesses due to their inability to grasp their technology efficiently.

“The easier we make it for angel investors to discover, evaluate and participate in science and technology startups, the more we’ll see money going into these worthy companies and the benefits to humanity accrue,” Chaturvedi said.

 

Potential return on investment (ROI)

Naturally, angels look for opportunities that will benefit them as well. Forty-nine percent ranked potential ROI as their top motivator for making an investment decision.

While some investors are indeed looking for financial compensation, not all are primarily interested in just the money. Some want a different kind of return: The ability to solve the world’s biggest challenges through the businesses they fund. Nearly one-third of angels will choose to invest in a company based on its connection to important social issues.

“Having an impact matters, especially when it comes to investing in things like curing diseases, feeding a growing global population, fueling the planet with clean energy and even taking us into space,” Lisheng Wang, Propel(x)’s co-founder and head of investor development, said in a statement. “Science and technology startups especially should take note that when raising capital, they should emphasize the impact of their solution besides potential returns to investors. It’s not only about the ‘what,’ it’s also about the ‘so what?'”

Over Startup Investors

If you’re looking for startup investors, having a good business idea is only half the battle. You won’t convince them based on your idea alone. The person deciding whether your business is worthy of their investment requires a well-thought-out plan, with details about the business, its growth potential, target market and more.

Business News Daily spoke with Michael Mocatta, partner and COO of Neta Ventures, and Keri Gohman, president of online accounting software company Xero Americas, about investor pitch meetings and how to ensure the relationship is a win-win for you and your investors.

 

1. Show investors you’re a low risk.

Benchmarks for raising venture capital have gone up over time as the cost of product development has decreased, said Gohman. Investors need to see a realistic business model and, in many cases, some initial traction. They also want to see how well the business has been thought out, an acute understanding of the business’s unit economics, and the lifetime value and cost of customer acquisition.

“Investors like to fund growth, rather than product development,” Gohman said. “A startup needs to be able to show an investor month-over-month growth over a certain period.”

 

2. Sell them on your team.

Your team is what makes your idea happen, and potential investors are looking at the people behind the idea.

“When fundraising, it’s important for business owners to show that they’ve been able to recruit a team, inspire the team to develop a solid product, a small subset of people who like using the product, and that the product has grown toward product-market fit,” Gohman said.

Mocatta noted that a common mistake is presenting yourself to a potential investor with a missing link, such as when you’re still looking for the “tech guru.”

“You’ll stand out for the right reasons if the people on your team have experience as well as contacts,” he said. “A diverse team with complementary strengths is what will turn an idea into reality.”

 

3. Create a simple tagline that shows your value proposition.

Entrepreneurs who live and breathe details of innovation find it hard to distill a concept into a simple idea that grabs the imagination of investors. You need to condense the vision of the business into a clear benefit that is compelling and dramatic, said Mocatta. A tagline is even more succinct than an elevator pitch, he added, so have this worked out and memorized before presenting your vision to others.

To define a meaningful vision, Gohman advises going beyond the business’s day-to-day operations and think about the “why.”

“A business with a true vision empowers those involved, giving them a reason to wake up in the morning,” Gohman said. “A vision should be used as a north star, guiding an organization in everything it does: hiring, development, customer acquisition.

Crowdfunding Takes Off for Small Businesses

It’s been a four full months since the Title III equity crowdfunding provision of the Jumpstart Our Businesses (JOBS) Act went into effect, allowing small businesses and startups to raise up to $1 million annually in crowdfunded securities investments from both accredited and nonaccredited investors. As of Sept. 15, businesses had raised more than $7 million in capital investments using Title III.

Although Title III is a particularly young section of the JOBS Act, it’s been hailed as a potential game changer for small-scale financing. Whether a company’s projected growth is too flat to interest venture capitalists or an owner simply doesn’t want to end up beholden to one highly powerful investor, Title III is seen as a way to raise growth capital without sacrificing independence. Moreover, campaigns can be targeted at locals within a business’s community, helping to build a loyal customer base that maintains a stake in the company’s success. [See Related Story: Title III Crowdfunding Ruling Changes Startup Fundraising for Good]

“I think Title III will change financing. If you look at how the industry evolved in Great Britain when they did it, we’re already growing faster than they were,” Mike Norman, CEO of equity crowdfunding platform WeFunder, said. “It will take a little time, as any new securities legislation does. Awareness is the biggest challenge right now. A true test and the most compelling part is that we now have companies that have raised meaningful funds from investors. How can they activate those investors in terms of promotion and customer loyalty?”

WeFunder has tracked the growth of the equity crowdfunding industry so far, and the early statistics appear promising. More than 9,000 investors have contributed $7.14 million so far, helping to fund 29 successful offerings, three of which raised the full allotted amount of $1 million in capital. In just the past seven days, investors from the crowd have contributed $112,068 to small businesses.

For companies like stock-photography gallery Snapwire, which crowdsources made-to-order photos from over 300,000 photographers worldwide, leveraging the power of an already-engaged community led the company to immense success in its Title III equity crowdfunding campaign. In 72 hours, Snapwire had eclipsed its fundraising goal. Now, the company holds about 280 percent of its goal in investments.

“The very truthful reason we got into equity crowdfunding is that we struggled to raise capital from traditional [venture capitalists],” Chad Newell, CEO of Snapwire, told Business News Daily. “We were such a leader in doing this — nobody had run a successful campaign yet at the time. I had little expectations other than a fair degree of confidence that we’d be successful.”

Lending Right for Your Business

So, your company needs money that you currently don’t have. Maybe your business is just taking flight and is still lacking the necessary funds, or perhaps you have high aspirations with low profits at the moment.

If loans are your go-to choice for financing, you’ll need to decide between a traditional bank loan and an alternative lender. For the latter, peer-to-peer (P2P) lending might be a smart option if you’re looking for a smoother, faster borrowing process.

According to Investopedia, P2P lending lets individuals borrow and lend money without an official financial institution as the intermediary. Lenders collect income from interest, usually at a higher cost than with traditional loans, while borrowers access financing they may not have been approved for elsewhere.

“P2P loans can often offer higher approval rates and competitive interest rates — a stellar combination,” said Emily Bartz, a writer at NextAdvisor.com, which provides independent research and comparison tools for financial, tech and business products. “The beauty of P2P lending is that it offers borrowers a more personal experience by avoiding big banks and financial institutions. Plus, borrowers can rest easy knowing that their lender is accredited and provides legitimate loan support.”

Another upside, according to Bartz, is that P2P lending is flexible, allowing borrowers to complete the process in pieces. [See Related Story: A Guide to Choosing the Right Small Business Loan]

 

Is P2P right for you?

So how can you determine if P2P lending is right for your business? Be sure to ask yourself these questions:

 

Is it legal in your state?

Not all states allow P2P lending. However, it may depend on the platform you use. For example, according to LendingMemo, 49 states provide funding through LendingClub, while only 47 do so through Prosper.

“Potential borrowers should make sure that P2P lending is legal in their state, as it is prohibited in some areas,” Bartz said. “You can usually find this information fairly easily on the lender’s website or by completing a quick Google search,” she noted.

Before committing to the idea, research which sites are accessible in your state.

 

How quickly do you need the loan?

One potential downside of P2P lending is that it might take longer than a traditional loan, thus hurting any immediate transactions or aspirations, Bartz said.

Bartz said that “if you are in a time crunch, P2P lending might not be ideal.” Make certain that your company’s needs are in tune with the time frame of your lending process before settling, she advised.

 

Is your financial standing good enough?

Bartz noted that it’s important to consider costs such as interest rates and origination fees. While not all P2P lenders require this, it’s smart to determine whether your credit score is high enough, and your business makes enough money, for you to be approved.

“It’s crucial that all potential borrowers have a clear understanding of exactly what they’ll be paying and have a plan to keep their payments consistent and on time,” she told Business News Daily.

Choose Your Words Closely

It’s not what you say, but how you say it that could determine how successful your crowdfunding campaign is, new research finds.

A study from researchers at the University of Illinois at Chicagorevealed that linguistic style, which is how one speaks, is critically important in crowdfunding campaigns, especially for social entrepreneurs.

The study’s authors found that how a pitch is voiced and worded is much more important for social entrepreneurs than it is for their commercial counterparts.

“Here, we show that the persuasiveness of entrepreneurs’ stylistic expressions is dependent on their category membership – that is, whether they are social or commercial entrepreneurs,” said Annaleena Parhankangas, the study’s lead author and an assistant professor at the University of Illinois Chicago in a statement.

For the study, researchers analyzed 656 Kickstarter campaigns between 2013 and 2014. They discovered that linguistic styles that made the campaigns and their founders more understandable and relatable to potential funders boosted the exposure and success of social campaigns. However, linguistic style made little impact for commercial endeavors. [Raising moneyv ia crowdfunding? 15 way to increase your chances for success]

“Early-stage entrepreneurs are increasingly involved in the theatrical pitching of their projects to various audiences at forums, such as accelerator demo days, pitch mixers, competitions and online crowdfunding sites,” Parhankangas said. “How they deliver the message matters – and, as a result, it is important to study how entrepreneurs’ language use affects their chances of raising funding.”

The study was co-authored by Maija Renko, a UIC associate professor of entrepreneurship.

The researchers said style doesn’t matter as much for commercial entrepreneurs. Instead, content is likely to be enough to persuade their audience to invest.

Great Ways to Use It for Growth

Unless you’ve aggressively saved money to bootstrap your business, you’ll likely need to borrow money at some point to make ends meet, whether it’s a formal loan through a bank or online lender or an informal one from family and friends.

Regardless of the amount or source of your loan, it can be tempting to make those big “nice to have” purchases when the money hits your bank account. However, it’s important to plan your spending carefully and allocate borrowed funds toward expenses that will ultimately accelerate your business’s growth.

We spoke with small business lending experts about smart ways to put business capital to work.

 

1. Equipment and operational costs

When you’re just starting out, you may not necessarily have the funds for all the basic elements your business needs to function. Jay DesMarteau, head of commercial bank specialty segments at TD Bank, said early-stage businesses will often use their funds for operational necessities such as buying inventory and building products.

“We are also seeing higher demand for lines of credit, which typically are used to finance short-term needs, such as buying or leasing equipment, purchasing a company vehicle or injecting cash into the business during a lean period, especially seasonal businesses,” DesMarteau added.

 

2. Payroll and hiring

A company is only as strong as the people behind it, and investing your new loan funds in hiring can be a great way to help your business grow.

“True growth means spending funds to add employees who can take over some tasks such as bookkeeping or ordering supplies and help support the daily functions,” said DesMarteau. “This will allow the business owner to better focus on long-term strategy and driving profitable revenue growth.”

Isaac Rodriguez, CEO of Provident Loan Society, notes that as a not-for-profit collateral lender, most of his organization’s loans are made for short-term expenses such as meeting payroll.

 

3. Soft costs

“Soft” costs, as opposed to “hard” physical assets or products, are those expenses that don’t directly help create a product or provide a service but are necessary to keep your business functioning. This includes things like licenses, marketing campaigns and professional fees, said Rodriguez. This could also cover fees for advisors like CPAs, attorneys and bankers.

“Maximize the use of capital,” Rodriguez told Business News Daily. “For example, don’t just pay legal fees and get tax returns done – explore how those professionals can help grow your business through referrals, recommendations, introductions, etc.”

What You Need to Know About Business Financing

Startup financing is a huge consideration and an important decision for any aspiring entrepreneur. There are plenty of ways to fund a business, and whether you borrow money, dip into your savings or go another route, you need to understand your options before you choose.

While these are far from the only ways to finance your startup, here are three of the most popular methods today’s entrepreneurs choose.

The notoriously high rejection rate of bank business loans combined with the proliferation of online lenders has made traditional business lending seem like it’s not even worth the time and effort. But plenty of small business owners still turn to local and national banks, as well as the Small Business Administration (SBA), to help them finance their operations.

“There’s still a lingering perception out there that banks aren’t lending, but that’s not true,” said Jay DesMarteau, head of regional commercial specialty segments at TD Bank.

“Traditional bank loans typically offer better terms and build credit, but the arduous [process] that comes along with this type of financing often overextends time-to-credit necessary to meet the small business’s needs,” added Matt Schaffnit, CFA, co-founder and COO of Lending Technologies Corp.

 

Alternative lending

Alternative lenders provide quicker, smaller, more flexible loans through an online application and transfer process. Depending on your credit score, you can be approved for a loan in a matter of minutes and have your money in just a day or two.

While having all these options can be great for businesses that may not qualify for a traditional bank loan, it also means you’ll need to be much more diligent about researching potential lenders and their reputations. Sabrina Parsons, CEO of Palo Alto Software, said that although online lenders will make a lot of promises about their funds, some are just “sharks” out to take advantage of small business owners.

“These sharks will charge business owners to ‘qualify’ for a loan and to have access to their lenders,” Parsons said. “[Also, some alternative] loans can come at a very high interest rate, and business owners need to understand the implications of these types of loans.”

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Schaffnit said the biggest trend in alternative lending is consolidation, and he believes this trend will persist.

“Newer alternative lenders are learning that managing net interest margin is more important than they realized,” he added.

He further noted that if the Trump administration follows through in lightening the regulations on lending, it could have a positive effect on small businesses’ ability to access capital from more traditional and thus more affordable sources.

“However, we also foresee an overall increase in regulations trending over time,” said Schaffnit. “We believe these side effects will be net-positive.”

 

Bootstrapping

Funding your business out of your own pocket – commonly known as bootstrapping – is the simplest but potentially most difficult financing route. On the one hand, you are in total control of your finances; you don’t have to make any payments to lenders or share equity with investors. On the other hand, you’re on the hook for every penny you sink into the company, and if it fails, your personal funds are going down with it.

“We see entrepreneurs end up in a position where growth and revenue is strong, but because of long payment cycles, they are short on cash to meet payroll, purchase supplies or acquire inventory,” said Ed Castano, principal product manager at TriNet. “Understanding your options, whether it be a bank line of credit, invoice financing, purchase order financing or something else, can be the difference between expansion, stagnation or layoffs for a small business.”

Bootstrapping is more about necessity than preferred method of financing, according to Schaffnit. More often than not, there is simply no other source of funding available to bootstrappers because they are too early-stage or lack the scalability for loan or venture financing, he said.

Goals Inspire Backer Confidence

While success or failure in crowdfunding campaigns hinges on a variety of factors, the most important aspect is the level of confidence backers have about the campaign’s outcome, according to a study by the University of Michigan, University of Toronto and Google.

“Pledging is not costless, and hence consumers would prefer not to pledge if they think the campaign will not succeed,” the study’s authors wrote. “This can lead to cascades where a campaign fails to raise the required amount even though there are enough consumers who want the product.”

When deciding whether to back an entrepreneur’s crowdfunding campaign, backers examine multiple factors, including the price of the product, how much has been raised, the funding target and how long the campaign lasts.

“The absence of early pledges makes those who arrive later pessimistic about the chances of campaign success, and therefore discourages them from pledging,” Mohamed Mostagir, one of the study’s authors and an assistant professor at the University of Michigan, said in a statement. “This can create a vicious cycle where even good products can fail.”

The opposite can hold true as well, according to Mostagir. He said early funding on a campaign can create a cascading effect that propels a campaign well past its funding goal. [See Related Story: Crowdfunding Entrepreneurs Should Sell Themselves First]

Based on their research, the study’s authors suggest that entrepreneurs consider a lower funding target in order to reduce the uncertainty in a backer’s mind about the chances of a campaign’s success.

They use the Coolest Cooler campaign on Kickstarter as an example. The campaign was first launched in 2013 with a funding goal of $125,000. At the time, it never reached its target.

However, when the campaign was relaunched several months later with a funding goal of only $50,000 it was wildly successful. The second campaign raised more than $13 million, making it the largest funded project in Kickstarter history at the time.

The study’s authors admit, however, that there are some risks to this type of approach.

“Of course, the downside to the strategy of shading the real target is that it is possible that the campaign ends up raising enough money to cover the artificial target — and hence ‘succeed’ — but not the actual one,” the study’s authors wrote. “This leaves the seller with a commitment to deliver a product that it does not have enough means of producing.”

In addition to considering a lower funding goal, it is also important to make sure backers can see in real time how much a campaign has raised, according to the research. The study’s authors said that if the backers can always see the current funding level, they may be more inclined to start pledging when they see that a campaign is doing well.